Retiring seems like an overwhelming prospect — because it is.
You’re trying to save up enough money to last the rest of your life, including uncovered health costs, and you’re not exactly sure how long you need to save for, because, well, you don’t know how long you’ll live.
But don’t panic. While the numbers are big, if you take things in steps and use the tools available, it’s doable.
Expenses drive everything, Robert Powell, co-founder of Finstream.TV, editor of Retirement Management Journal and a MarketWatch columnist, said in an interview during MarketWatch’s Mastering Your Money event, which examined saving, spending and investing and the impact that COVID-19 had — and will have — on our lives.
Robert Powell of FinStream.TV chats with MarketWatch retirement editor Angela Moore about tips on determining when and where to retire, how to handle healthcare and other expenses — and how to avoid outliving your money.
Get an idea of your expenses
People should start off by determining what their expenses will be in retirement, but Powell acknowledges that it isn’t an easy task.
“What your expenses will be in retirement is actually a hard question to answer, in part, because you don’t know how long you need to fund your retirement, you don’t know your date of death…if you knew your date of death I could build you a perfect retirement plan,” he said with a laugh.
However, one place to start is by assuming you’ll have a long life. Powell suggests people “plan” to live to age 90 or 95, and that could mean a 30-year retirement.
One way to estimate what your costs will be is to “ballpark it” and set a budget of 80% of your preretirement income, or a better strategy, Powell said, is to use a spreadsheet or budgeting tool to figure out more precisely what your spending will be — keep in mind that you’re likely to spend more in the early years of retirement than you do in the later years.
If you’re married, make sure that financial plans include enough money to cover the expenses of a surviving spouse in the likely case that one of you will die first.
Save, and then save some more
Save aggressively, and constantly monitor whether you’re reaching your goals, so you know if you need to save more, invest more aggressively, or work longer. “You’re going to be constantly monitoring and adjusting your plan as you go,” Powell said.
What about working longer as a way to fund your retirement years?
“It’s good advice because most people are behind the 8-ball,” Powell said. “[Only] half the people who say they plan to work longer into retirement are able to do that — they suffer the loss of a job, a healthcare shock, they have to become a caregiver. So telling someone to work longer is a great plan, but if it’s only a coin-toss whether you’ll be able to work longer, you’d better have a backup plan to your backup plan.”
Staying healthy isn’t cheap, but it’s manageable
Then there’s the ever-rising cost of healthcare in retirement. Fidelity Investments said earlier this year that a 65-year-old couple retiring in 2021 would be facing roughly $300,000 in out-of-pocket healthcare costs over the rest of their lives.
An eye-popping number like that makes most of us feel hopeless, Powell said. “Most people don’t even have that much set aside in their 401(k), so how in the world would they be able to fund those kinds of expenses in retirement?”
The key is not to think about it as a lump sum that you need to have on hand at age 65, think of it as an annual expense.
There are different types of healthcare costs, he pointed out. Some of those expenses are predictable, and could be paid from sources of income like Social Security, while unpredictable expenses might be paid through assets, so you might spend $5,000 a year if you’re single, maybe $10,000-$12,000 if you’re a couple.
Investors should set aside up to 15% of what they’re saving for retirement and earmark it for healthcare expenses. “Then I think you’ll be fine, because healthcare expenses represent an increasingly large portion of a person’s budget in retirement and healthcare expenses can escalate at a rate of twice the average cost of living.”
Powell said health savings accounts (HSAs) are a good way to set aside money for healthcare in retirement. If you have access to one at work he advises funding it and not tapping into it now, instead letting it grow for future expenses and invest it as you would an IRA or a 401(k). (Note you must have a high-deductible health plan to be eligible for a health savings account. Read more about the rules for HSAs.)
If you’re not sure which investment vehicle to fund first, Powell has this advice:
“If you have a company that provides an employer match on your 401(k), obviously fund that to get the full match, that’s free money. And then after that start funding your HSA to the fullest amount possible, and then once you fund that and there’s money leftover then think about going back to your 401(k) and trying to max out.”
Can I finally spend my money?
When it comes to spending the money you’ve saved up in retirement, how do you know how much you can spend? This is called decumulation and it’s a hot topic in retirement circles. A popular rule of thumb is the 4% rule, which essentially says you can withdraw 4% of your portfolio each year of retirement and never run out of money. Not everyone is a fan, including some of the rule’s creators and Powell, who says it’s no longer valid.
“What you’re doing is relying on risky assets to generate income for what oftentimes is an essential need,” Powell said. “I’ve become a fan recently of the bucket approach…because it guarantees the possibility of you having exactly the amount of income you need to fund the next two or three years of retirement.” Powell wrote a helpful column about the bucket strategy, read more here.